Director's Loan Accounts: beware if overdrawn

Companies Nov 1, 2013

A director's loan is a loan made by a company to a director (or related party). HMRC has been trying to prevent directors to borrow money from their business because this is money, they would have to draw either as salary or dividends otherwise and pay tax and NI on those amounts.

In 2010 HMRC published the Corporation Tax Act 2010 and section 455 put in place some rules to prevent the practice: if a close company makes a loan to a relevant person who is a participator in the company or an associate of such a participator and if this loan is outstanding at year end, then 25% of that loan will have to be paid under Corporation Tax to HMRC – unless the loan is reimbursed before tax is due (usually 9 months after the year-end). Moreover, if at any point in time, the loan balance is above £5,000 the whole loan becomes a benefit in kind for the director.

It looks like this was not effective enough since HMRC estimates that the total balances of overdrawn accounts now exceed £1 bn. As a result, the scope was extended to cover partnerships and trusts and most importantly to prevent the frequent practice of "bed and breakfasting" used by many directors in the past: where a company makes a loan after 20 March 2013, s.455 CT2010 is now extended to apply if:

  • The loan is to trustees where one or more of the trustees, or beneficiaries of the settlement, is a participator in the company (or the associate of such a participator); or
  • The loan is to an LLP or other partnership where one or more of the partners in which is an individual who is a participator in the company (or their associate); or
  • When repaying the loan before the deadline, either £5,000 of the repayment is reversed within 30 days or the loan is for more than £15,000 and there is an intention to make a new payment at any time of at least £5,000.

In other words, the "bed and breakfast" practice of borrowing from a friend for a month or so to avoid the charge will not work anymore. Obviously, it's still possible to write off the loan but doing so will not attract corporation tax relief and it will generate a benefit in kind for the value of the loan attracting both dividend tax and class 1 national insurance (both employer and employee).

The only bit of good news I guess is that the £5,000 cap under which no benefit in kind is due will increase to £10,000 from April 2014.

UPDATE: From April 2016, the s.455 charge goes up from 25% to 32.5%. The £10,000 threshold remains unchanged though.


Franck Sidon

With over 15 years of experience as a Managing Director at TaxAssist Accountants, I have helped thousands of businesses and individuals achieve their financial goals and optimize their tax efficiency.